Car companies look to fintech to fund new lending and financing

Technology has improved notoriously poor customer experiences in industries like public transportation, healthcare, and banking. Car purchases and financing certainly deserve their time in the fintech sun, too.

From its 2007 pit of despair, the auto industry has slowly and quietly climbed back. Car sales in 2015 reached levels last seen in 2000. Automakers’ stock prices are up, too.

This growth has attracted new tech players. Leading marketplace lender, Lending Club now offers auto refinancing. Some startups, like AutoFi, are beginning to make inroads. The two year old Bay Area firm just inked a partnership with Ford’s credit arm that will help customers shopping for a Ford arrange financing online for their purchases. That’s a big deal and a sticking point for many potential car buyers.

“The car buying process still kind of stinks,” said John Jacobs, director of fintech strategies at eOriginal, which sells technology to the auto finance industry. “I recently went to buy a car for my daughter. We were cash buyers and yet we still sat in there for two and a half hours.”

New players have their eyes fixed on car financing. Demand for auto loans has increased dramatically over the past few years. There’s $1 trillion in outstanding auto loans, up 50 percent from 2010. Institutional investors want more exposure to the asset class and fintech startups can smell the money.

The auto loan, as a product though, hasn’t really seen a lot of innovation. “Let’s face it…there’s nothing sexy about an auto loan,” said Michael Cochrum, vp of analytics and advisory services at CU Direct,  the largest point-of-sale and indirect auto lending network of credit unions, representing over 11,000 dealers and 1,100 lenders. “It’s essentially been the same product for 40 years.”

Tech firms, like CU Direct, have realized that a person shopping for a car isn’t necessarily shopping for a loan. So, they focus instead on improving the experience around auto financing before a customer ever gets to that stage of the buying process. Working with a customer’s credit union, CU Direct offers an online vehicle research tool and looks for ways to pre-approve loans, so the customer can really focus on the shopping experience. “We really work to complete the entire process, and the loan only comes at the end,” he said. “We assume if we do a good job bringing the customer through the process, we’ll get there.”

While other forms of financing have seen more external innovation from fintechs over the past few years, the automotive finance industry has improved its own game. The entire buying process has become more transparent, giving buyers the tools to understand how much car they can afford. So, when a buyer enters a dealership, she does so with realistic expectations.

Second, data plays a huge role in enabling loan growth. Online financing tools capture and validate an applicant’s complete information when applying for a loan. This accuracy means that online financing options provide a better experience than the exhausting back-and-forth typical of offline loan applications.

“It used to be that you had to fill out everything on paper,” said eOriginal’s Jacobs. “When that happens, you lack complete application information about 30 percent of time. That costs a lot of money. The electronic world ensures all data is there and validated. You don’t need to come back for more info.”

Originating an auto loan online is just the beginning of the process. By the time loans are packaged up and sold to the secondary market, it’s likely that dozens of entities, including attorneys, rating agencies, and investors, have reviewed them. Technology solutions like eOriginal play an important role in creating uniformity for the ecosystem.

At 20 years old, eOriginal is a wise elder digitizing the lending process, particularly in the automotive industry. In the early 2000s, the firm built a lot of the technology that went into the two major automotive dealer portals, Dealertrack and RouteOne. With e-signature solutions and the ability to provide transaction support all the way through the securitization of loans, eOriginal uses technology to connect dealers to bankers.

Instead of fighting new fintech upstarts, the incumbents are slowly finding ways to partner with them. It’s this level of collaboration in the ecosystem that seems to play to everyone’s strengths. “When a company derives 95 percent of its revenue from one channel, it’s difficult to focus on something that doesn’t bring immediate returns,” said CU Direct’s Cochrum. “There’s a comparative advantage when a tech firm helps an incumbent. It all boils down to expertise — it’s frequently easier to have someone outside the operation identify what challenges need to be addressed.”

Collaborations like AutoFi and Ford come at a time that the auto industry is experimenting with technology and new business models. With Maven, an app that connects consumers with GM rentals and car sharing services like Uber and Lyft, GM now describes its future as a personal mobility company. Daimler recently bought a bitcoin firm and intends to develop it into a new service called Mercedes Pay.

Fintech will also continue to play a role in auto financing. With the abundance of data about users, the industry still seems passive when it comes to servicing customers in early buying mode. With Amazon’s Alexa, a user can speak into a box, order something, and have it delivered hours later. Between our personal finance activity, our mobile phone activity, and our driving habits, lenders can become more proactive in servicing potential borrowers.

“The number one problem we hear from our credit union lenders is that they don’t know when their customers are going to buy cars,” said Cochrum. “We have all the info we need about people, especially if they are our existing customers. Why can’t we change the process so that they only need to make a car buying decision, and all the financing is already in place?”

It’s not just financing that’s changing. There’s an opportunity for partners in the ecosystem to provide a better payment experience, as well. There are quite a number of bills, like financing, gas, and insurance, associated with car ownership and use. If more collaboration occurs in the ecosystem, Cochrum believes there’s no reason this couldn’t be simplified.

“What if you could get all these entities working together and have payments float through a single account?” he asked. “A customer would only have to make one monthly payment.”

With new financing and payment options, car companies are looking to fintech for their futures.

Slowdown in marketplace lending? Maybe, but digitization is on fire

marketplace lending securitization

There’s been a lot of talk about a slowdown in online lending and an overall weakening in demand for consumer loans.

Technology providers that service the industry aren’t seeing any of it, though. Online lenders are busy growing the securitization side of their businesses, where they package their loans together into investable securities and sell them to institutional investors. To do this, they’re turning to third party service providers.

“Startup online lenders typically start with good technology, user experience, and customer service but they have to feel their way through the financial regulatory world, adjusting as they go,” said Stephen Bisbee, CEO and President of eOriginal, a technology provider active in the Digital Transaction Management (DTM) space. “When they get to the securitization phase of their businesses, they turn for help.”

Securitization is the next stage of online lending

Securitization of online loans is a more complicated process than simply originating loans. Because of the massive increase in scale needed — an individual loan on an online marketplace may only be $10 thousand dollars, but a securitization can be in the hundreds of millions or billions of dollars — it’s imperative that the entire lifecycle of the transaction be digitized.

Take the auto loan industry. The auto loan industry experienced massive growth by creating 2 industry portals that enabled fully electronic auto loans — from dealership to secondary market — in mid 2000. Nissan did its first securitization in 2005 and now, Toyota and Ford both complete over 80% of their transactions electronically.

Marketplace lending is undergoing its own maturation process, too. “As marketplace lending moved from p2p to institutional capital sources, leading platforms began to look at how they were going to take electronic originations and sell them out into market,” recalled Bisbee. eOriginal counts 10 online lenders as clients including Funding Circle, Earnest, SoFi, Upstart, Apple Pie Capital and Borrower’s First.

Online lenders branching out

eOriginal’s Bisbee expects online lenders to continue expanding their product lines, requiring different levels of digitization. “SoFi began with student loan refis but it’s getting into auto finance and more,” he said. “It’s now offering mortgages. Mortgage is where we started 20 years ago, creating the first fully electronic mortgage for online lenders. We can enable everything on a mortgage after origination. In the time share world, with one customer, our firm enabled 180 thousand mortgages in 18 months.”

Based on demand from online lending clients, eOriginal, which charges a yearly platform fee plus transaction fees, has never been busier. The private company recently doubled its sales and revenue estimates for 2016, as its customer base has grown by more than 70%. And CEO Bisbee just isn’t seeing a slowdown: “In our world — when you focus on the securitization side, it’s just a pricing issue. Once you can get out to the secondary market, there’s always a buyer — it’s just a matter of what they’re willing to pay for debt.”

Regulations cometh

For its part, Digital Transaction Management, as an industry, is set to be a $30 billion market by 2020, according to Aragon Research’s Jim Lundy. For this whole online lending experiment to work, it’s not just about digital signatures: like the auto loan industry, it’s about finding a way to create industry-wide alliances between distributors, originators, investors, and technology providers.

The move towards fully digitzed transactions is also being fueled by the concern that regulation is on its way to the online lending industry. eOriginal has the ability to provide real-time audit and data analytics at the document, transaction, and portfolio level. “The world is moving away from a document-centric perspective to the trusted-data perspective,” Bisbee explain. “In this world of financial services, whether you’re a lender or investor, you should never need to look at a document. You should make decisions based on data and that data needs to be trusted and auditable.”